When people talk about international investing, they will come across the terms "ADRs" and "GDRs", which are not commonly used but may appear more complicated than they sound. The Global Depository Receipt (GDR) is primarily used for companies to raise capital from overseas investors.
This option enables foreign investors to purchase securities connected to the corporation, but not to the share issuance of another domestic stock exchange. It provides international capital markets for companies. It expands investor opportunities to invest in foreign enterprises via the well-known financial markets.
Key Takeaways
-
Certificates issued by international banks representing shares in a foreign company, which are held securely by a domestic custodian.
-
Companies can efficiently raise foreign capital and diversify their investor base without a costly direct international listing.
-
Listed on international markets like London and Luxembourg, GDRs can be converted back into the underlying domestic shares.
-
Investors face exposure to currency fluctuations, varying liquidity, and the political or economic stability of the home country.
What Is a Global Depository Receipt?
When considering international investment structures, the question of what a global depository receipt is likely to arise. A Global Depository Receipt (GDR) is a financial instrument issued by a depository bank for shares of a foreign company. The investors do not buy shares from any other country's stock exchange, but rather the GDR is listed in the international markets.
The depository bank does not hold the underlying shares directly. Those are held by a domestic custodian bank in the issuing company's home country, while the depository bank issues GDRs against them in international markets. A company in India could, for instance, market GDRs in Europe to foreign investors. This enables the overseas investors to invest without establishing a trading account in India directly. GDRs are primarily used by many companies to tap into wider markets of international capital.
How Global Depositary Receipts (GDRs) Work
The typical global depository receipts are implemented through a depository bank arrangement. The company initially places a certain number of domestic shares into a bank's vaults in its own country. A depository bank then issues GDRs on those shares in the international markets. The investors buy and sell the receipts, rather than the underlying domestic shares.
The value of the GDR typically remains linked to the value of the shares, although in some cases, the value may be affected by currency fluctuations and other factors on the international market. This facilitates overseas investment since the investors can invest through their familiar foreign exchange system instead of investing directly in another country's exchange trading system.
Example of Global Depository Receipts
An example of a successful GDR issuance is Infosys Limited. In 2013, Infosys facilitated a GDR offering of 30 million receipts on the Luxembourg Stock Exchange at $14.58 per GDR, each representing one share, with JP Morgan Chase Bank as the depository. The offering, valued at approximately $437 million, provided international investors access to Infosys shares without the need to trade directly on Indian exchanges. This strategy helped Infosys broaden its investor base, increase liquidity, and gain exposure to a global audience.
Several other Indian companies have recently issued GDRs to tap into global capital markets. Notable examples include:
-
Axis Bank Ltd.
-
GAIL (India) Ltd.
-
Larsen & Toubro Ltd.
-
Mahindra & Mahindra Ltd.
-
Reliance Industries Ltd.
-
State Bank of India
Global Depository Receipts Mechanism
The term "Global Depository Receipt" implies a depository bank's role in issuing these instruments on behalf of a foreign company. When a company wishes to issue GDRs, it collaborates with an international depository bank and a local custodian bank. The process involves:
-
Depositing the underlying shares: The issuing company delivers a specific number of shares to a Domestic Custodian Bank located within its home country.
-
Issuing GDRs: The offshore depository bank, upon receiving confirmation from the local custodian, issues GDRs abroad to represent ownership of those shares.
-
Custody and conversion: The underlying shares are held by the domestic custodian bank, while the GDRs are available for trading on international stock exchanges. GDR holders can convert them into the actual underlying shares if desired by surrendering the receipts to the depository bank.
Features of a GDR
A Global Depository Receipt combines several important features that attract both companies and investors:
-
Currency denomination: Often in U.S. dollars or euros, making it accessible to a global audience.
-
Issuer intermediary: Issued by an international financial institution (depository bank) on behalf of foreign companies.
-
Underlying shareholding: Represents ownership in a foreign company, with the physical shares held by a domestic custodian bank.
-
Dividend distribution: GDR holders receive dividends in foreign currency, which are processed and distributed by the depository bank from the underlying company’s shares.
-
Conversion flexibility: Convertible into the actual shares it represents, subject to local cross-border capital regulations.
-
Regulatory compliance: Adheres to regulations in both the home country (such as SEBI guidelines in India) and the foreign countries where they trade.
-
Electronic and transferable: Can be held electronically and transferred among investors easily.
-
Indirect voting: Voting rights cannot be exercised directly by the investors; instead, the depository bank holds the voting rights and votes on behalf of the GDR holders, usually based on their specific instructions or via a management proxy agreement.
Important Considerations for Global Depositary Receipts
Before investing in global depository receipts, investors usually look beyond the company itself and examine market-related factors too. Currency movement often affects returns because GDRs trade internationally while the underlying shares belong to another domestic market.
Changes in exchange rates sometimes influence investor gains even if the company’s stock price remains stable. Liquidity also matters. Some GDRs trade actively, while others may have lower trading volumes. Lower liquidity sometimes affects pricing and ease of buying or selling.
Investors also review:
-
Regulatory conditions
-
Foreign market risks
-
Political and economic developments
-
Tax treatment across countries
Another thing worth noticing is pricing differences. At times, the GDR price and domestic share price may not move exactly the same because different markets react differently to news and investor sentiment.
Advantages of Global Depository Receipts
-
Access to international capital: GDRs allow companies to reach international investors without a direct foreign listing, expanding their capital base.
-
Improved liquidity: International exchange listings can improve liquidity, making shares more accessible and tradable for global investors.
-
Diversification of investor base: GDRs enable companies to tap into a diverse pool of investors, reducing reliance on domestic funding sources.
-
Cost-effective foreign capital raising: Issuing GDRs is significantly less expensive and carries fewer regulatory burdens than listing directly on a foreign stock exchange via a traditional cross-border IPO.
-
Brand building: An international presence through GDRs can enhance a company’s global brand and credibility.
-
Currency hedging potential: Investors can benefit from built-in currency hedging if GDRs are issued in widely traded currencies like USD or EUR, sheltering them from home-country currency depreciation.
-
Increased valuation potential: Listing on an international exchange may lead to higher valuations due to access to a larger, often more favourable market.
-
Enhanced reputation: A GDR listing signals commitment to global growth, making companies more appealing to international investors.
Disadvantages of Global Depository Receipts
Despite their many advantages, GDRs have certain drawbacks:
-
Currency risk: GDRs are exposed to currency fluctuations, which can negatively impact their value when translated back into the domestic company's accounting currency.
-
Regulatory compliance costs: Companies must comply with regulations in multiple jurisdictions, leading to higher compliance costs.
-
Liquidity risks: In some cases, specific corporate GDRs may not be as liquid as their domestic shares, resulting in a wider bid-ask spread and potential difficulty in buying or selling shares.
-
Indirect voting rights: GDR holders often do not have direct voting rights, limiting their control over company decisions unless executed via proxy instructions through the depository bank.
-
Cost of issuance compared to local markets: Issuing GDRs is generally more costly than raising capital domestically, due to additional international underwriting, global legal fees, and compliance requirements.
-
Limited market access: Certain markets may restrict GDR availability to specific investor classes (such as Qualified Institutional Buyers), reducing potential retail demand.
-
Country risk: GDR holders face risks associated with the issuing country’s political, economic, and regulatory environment.
-
Taxation complexities: GDRs may attract complex cross-border withholding tax rules on dividends. However, actual double taxation is usually mitigated through Double Taxation Avoidance Agreements (DTAAs) and foreign tax credit systems.
GDRs Compared to ADRs and IDRs
To understand GDRs better, it’s useful to compare them with similar instruments: American Depository Receipts (ADRs) and Indian Depository Receipts (IDRs).
|
Parameter |
Global Depository Receipt (GDR) |
American Depository Receipt (ADR) |
Indian Depository Receipt (IDR) |
|
Negotiability |
Globally negotiable |
Negotiable only in the U.S. |
Negotiable only in India |
|
Currency |
Typically USD or EUR |
USD |
INR |
|
Issued In |
European and global markets |
U.S. market |
Indian market |
|
Purpose |
Allows a company to tap into international investors globally |
Allows U.S. investors to buy shares of foreign companies |
Allows Indian investors to buy shares of foreign companies |
|
Primary Exchange |
London, Luxembourg |
NYSE, NASDAQ |
NSE, BSE |
Note: The IDR market in India is currently inactive. Standard Chartered PLC was the only company to have issued IDRs, which were delisted in 2020. The regulatory framework exists but no IDRs are currently listed in India
Know More About: Indian Depository Receipts (IDRs)
Conclusion
GDRs primarily provide a link between companies that want to access international capital and investors who want to gain international exposure. They make it easier for the cross-border investor to trade company-linked securities on recognised exchanges in the foreign country, rather than obtaining the securities directly from the other country.
GDRs give companies increased access to foreign investors and to overseas funding opportunities. In the eyes of investors, they are an additional way to diversify from the local market. However, considerations such as currency fluctuation, liquidity, and foreign market conditions remain relevant when assessing these instruments. GDRs are easier to follow and analyse from a practical standpoint once investors have a basic understanding of the structure.
Looking to invest? Open a Demat Account with Angel One and start trading seamlessly.
